Manufacturers are looking to opportunities in Southeast Asian countries as the cost of operating on their traditional sites in China grows. This could boost much-needed growth in the regional ASEAN economy.
By Holly Reeves
China’s position as the world’s factory faces a threat from within. Smartphone maker Xiaomi just announced that from now on all the units they sell in Indonesia will also be manufactured there. This means new jobs for Indonesians and a turnaround for Southeast Asia’s manufacturing industry where China has long been king.
Beijing’s Ambassador to Indonesia, Xie Feng, says localising production in this way means that China-Indonesia cooperation has entered a new stage. A relationship that was once about simple commodity trade and project contracting has moved to investment Indonesia and technology transfer.
Wang Xiang, senior vice president of Xiaomi added that, “Local manufacturing is a milestone for Indonesia and …through local production, we can now bring more exciting products to Indonesia. We are committed to integration with local productivity and will explore with the local software developers.”
The low cost of labour is a big draw for multinationals chasing profits
Global management firm McKinsey says this type of move is more about money than managing friendships. The low cost of labour in ASEAN nations like Indonesia, Laos, Myanmar, and Vietnam is a competitive advantage for multinational firms. The average cost of factory labour in China is $28 a day. It is $7 a day in Vietnam and $9 in Indonesia.
We “believe Southeast Asia will take up China’s mantle of the ‘world’s factory’ over the next 10-15 years as companies move to take advantage of cheap and abundant labour in areas such as the Mekong,” says Glenn Maguire and ANZ Bank economists.
This is because of the growing commercial and logistical connections between cheap labour in Southeast Asia and sophisticated producers in Singapore and Malaysia. The region also offers the geographical benefits of producing goods so close to large and growing markets, as well as Indian and Pacific trade routes.
The rise of the so-called MITI-V (or mighty five) of Malaysia, India, Thailand, Indonesia, and Vietnam will be a defining factor in global trade in the next decade adds market analysts Deloitte. Their competitiveness index predicts that a fall in Chinese competitiveness, together with a push to improve American manufacturing will benefit these countries and see more work shift from China to its Southeast Asian neighbours.
Costs are low, but so is worker productivity
This is because the world’s largest market is moving from being export-driven to consumption-driven amid rising wages. However, although labour costs in Southeast Asia are lower than China, so is worker output. In 2012, average labour productivity in Vietnam’s manufacturing sector was only about 7% of that in China. This leaves companies with an interesting dilemma of balancing costs and growth.
“The Southeast Asian countries of Indonesia, Malaysia, Thailand, and Vietnam continue to garner the interest of global manufacturers looking for alternatives to China with the availability of skilled workforce and growing labour productivity, as well as the lower manufacturing labour cost in comparison to China,” Ng Jiak See from Deloitte Southeast Asia explains.
“Other advantages that these countries offer to global manufacturers include numerous tax incentives in the form of tax holidays ranging from three to 10 years, tax exemptions or reduced import duties, and reduced duties on capital goods and raw materials used in export-oriented production,” added Ms Ng.
Paperwork and procedures need reform to realise the full economic potential
A huge opportunity is emerging for Southeast Asia as ASEAN integration increases local and global trade; attracting more production from multinationals as Chinese facilities costs rise. If it were counted as a single country, ASEAN would already be the world’s seventh-largest economy with a combined GDP of US$2.4 trillion.
By comparison to China, ASEAN nations offer a young workforce and low wages but there are challenges that need to be addressed to help these relationships take root. For example, the big data, mobile Internet and disruptive technologies in which many firms currently lag behind must be embraced. Import and export costs are also 24% higher in ASEAN than in China, and the region’s customs procedures take 66% longer than the Organisation for Economic Cooperation and Development (OECD) average.
Manufacturing orders are currently low
These issues are reflected in the recent manufacturing purchasing managers’ index for Vietnam, Myanmar, Thailand, Indonesia, Malaysia and Singapore which shows most countries performed badly and orders fell to the lowest level in eleven months. To turn this around ASEAN must show itself as open for manufacturing business with a skilled workforce and credible infrastructure.
China’s crown as the factory of the world is there for the taking. The ASEAN nations just need to stretch out and grab it.